In 1972, when Kansas implemented a school-finance equalization
formula, John Bottom was one of its staunchest critics.

Like equalization formulas in other states, the one in Kansas was
designed to help poor, primarily urban districts, not the sprawling,
land-rich agricultural areas of the state, like Beloit, where Mr.
Bottom serves as superintendent of schools.

For nearly a decade, that's exactly how it worked. Until three years
ago, Beloit, a relatively wealthy district in north central6Kansas,
didn't receive one penny from the state through the equalization
formula.

Then, almost overnight, everything changed, as the farm boom of the
1970's gave way to the crisis of the 1980's. Declining exports, high
interest rates, and the lower inflation combined to cut into the value
of farm property throughout the 12-state farm belt, reducing farmers'
wealth and increasing their opposition to local taxes that support
schools.

Each of the last two years, when Mr. Bottom went before the local
school board, he was told, he said, that "there could be no tax
increase, period. The economy simply would not stand it." Program and
staff cuts seemed inevitable.

But fortunately for Mr. Bottom, the school-aid formula that he had
railed against came to his district's aid. In three years, due to the
decline in local property values, Beloit's state aid jumped from
nothing to $900,000, now accounting for almost 40 percent of the
district's $2.5 million budget. In the next fiscal year, state aid
could reach more than $1.2 million, according to Mr. Bottom.

"I can tell you, in the last three years I've changed my mind," Mr.
Bottom said, referring to the equalization formula. "I don't mind
eating a little crow."

Beloit's experience, says another Kansas superintendent, Furman
Marsh of Shawnee Heights, is simply an example of an equalization
formula working as it is supposed to: When a district loses wealth, it
is compensated by the state.

Shift in Taxation

Mr. Marsh's district and others have not been so fortunate. Due to
its newfound property wealth relative to districts like Beloit, Shawnee
Heights, which mixes farm land with suburban property, has seen its
state share drop from 63 percent last year to 59 percent this year.

"We desperately need a 4 percent increase [in local taxes] to stay
where we were last year, and that would be without improving
anything,'' Mr. Marsh said.

But due to the economic downturn fueled by the farm crisis, Mr.
Marsh, like Mr. Bottom, is in no position to obtain a local tax
increase.

"The community is already facing its maximum amount of property
tax," he said. "I don't think the public could support schools more
even if it wanted to."

According to Ray Hill, president of the Washington State Grange,
farmers feel that property taxes place a disproportionate burden on
them, and they oppose measures that would make it easier to raise
levies. "We recognize the fact that there have to be taxes, but we feel
the burden should be on the general public as a whole," he said.

But as Mr. Marsh pointed out, non-farmers have also been hurt by the
farm crisis and in many cases are no more capable of withstanding a tax
increase than the farmers. "In Kansas, everything that isn't
agriculture is agriculture-related," he said.

Farm-Belt Pattern

School districts in other farming states face similar problems, but
their experiences vary depending on the way property is assessed, their
ability to tax, the type of state-aid formula, and the level of state
funding.

But while these factors differ from state to state, some common
patterns emerge across the Farm Belt. The problems of the agricultural
sector have brought increased pressure on the property tax--a widely
disliked but usually stable source of revenue--a shifting of the tax
burden from rural to urban areas, and an increased demand for state
funding.

In several states, including Iowa, Nebraska, and North Dakota,
legislatures are moving, or already have moved, to change the state's
school-finance structure, in part due to the financial stresses caused
by the farm crisis.

In Nebraska, for example, the legislature is considering a
constitutional amendment that would limit property taxes to funding
one-third of local school budgets. If approved, that would require a
massive shift to sales and income taxes collected at the state level to
support the schools, according to Gary Healey, a consultant for the
finance division of the state's education department.

State revenue currently provides about one-third of the cost of
precollegiate education in the state, he said.

In Iowa, legislators are considering a wholesale revision of the
school-aid formula that would take into account declining enrollments
and the stagnant economy, and would increase the state's share of
precollegiate-education costs to 50 percent.

The Crisis

Underlying these stresses on school finance is the most severe farm
crisis since the Depression.

During the 1970's, farmers experienced a boom, fueled by a surge in
exports and an inflationary economy. Land values skyrocketed, enabling
farmers to secure more loans and cultivate more land.

But the bubble burst in 1981, when the Federal Reserve Board, which
controls the money supply, acted to raise interest rates to wring
inflation from the economy. Due to the overvalued dollar, the level of
American exports fell, and the price of farm goods dropped
precipitously as farmers tried to unload the output of the holdings
they had expanded during the 1970's.

Land, which farmers use as collateral to secure loans, also declined
in value, as farmers' anticipated revenues fell and other investments
became more attractive.

"With interest rates rising and inflation falling, you could not
justify investing in land with a 3 percent return," said Neil E. Harl,
professor of agriculture and economics at Iowa State University. "Land
values had to fall."

From 1981 though 1984, farm land values dropped 8 percent
nationwide, but far more steeply in the Farm Belt. According to Mr.
Harl, Iowa has lost half the value of its farm land since the crisis
began, while other Central and Midwestern states have seen land values
drop 20 to 30 percent.

As the values have declined, lenders have increased the pressure on
borrowers, catching them in a "pincer movement" of falling assets and
rising debt loads. Since two-thirds of all farm debt is held by about
one-third of all farmers--primarily family farmers, with mid-sized
holdings--many, perhaps up to 15 percent, face the prospect of default,
according to Mr. Harl.

An attendant problem, according to Calvin Beale of the U.S.
Department of Agriculture, is that the farmers in the most trouble tend
to be the younger ones, between the ages of 25 and 50, who were more
aggressive in the 1970's and now find themselves more deeply in
debt.

Default by these farmers would accelerate movement off the land and
place an added burden on rural school districts whose state aid is
based on enrollments, Mr. Harl and others said.

el6Assessments

School districts in most farming states have yet to feel the full
impact of the crisis, either because farm land has not been reassessed
to reflect its lower value or because of a lag time between
reassessments and collections.

In Iowa, for instance, taxes on farm land actually rose last year,
despite the steep decline in land values, according to Mr. Harl. "The
assessed valuation has been going up, even though the fair market value
has been going down," he said. "That's causing people a lot of
concern."

One reason is that land in Iowa is assessed on the basis of
productivity, rather than fair market value. A relatively common form
of assessment, productivity indexes mitigate wild swings in
assessments, so that assessments rise less sharply than land values in
good times, and fall less steeply in bad times.

Also, according to Mr. Harl, taxes now being paid in Iowa were
levied "more than a year ago," and fail to reflect the declining
productivity of the land.

"If assessments go down, then we'll have problems," said Lukas J. de
Koster, president of the board of the state department of public
instruction.

Declines in Illinois

One state where assessments have fallen and districts have seen
their budgets squeezed is Illinois. Some rural Illinois districts have
reported valuation declines of up to 33 percent in the past two
years.

Illinois used to base agricultural assessments on a percentage of
fair market value, but switched to a productivity index two years ago
to soften the blow of declining land values.

According to Gerald Glaub of the Illinois Association of School
Boards, the change in assessment procedures was a positive step. "If we
were still on the old market-value system, taxable values would have
gone down even more," he said.

But since assessments based on the productivity index are being
revised on an annual basis to closely reflect any changes in
productivity, assessments in Illinois have more accurately reflected
the farm decline than those in other states.

The Illinois legislature stepped in last year and placed a 10
percent limit on assessment declines in a single year, slowing the
erosion in local funds that support schools.

According to Mr. Glaub, the erosion of local funds might seem to
indicate that the state would pick up a greater share of education
costs, but it does not work that way in Illinois, he said, because
education "is funded at such a low level that only two-thirds of the
districts even qualify for state aid."

"If they're considered wealthy, they might not make up a dang
thing," he said.

As in other states, like Kansas, "what happens when farm assessments
decline is that the burden is shifted to nonfarm property," he
said.

In other farming states, including Iowa, Missouri, Nebraska, North
Dakota, and Wisconsin, school-finance experts said that assessments
have yet to reflect declining land or productivity values. But they
agreed that assessments may drop in the near future.

"That could happen beginning this year, as lagging farm values creep
into the computations," said George Tipler, executive director of the
Wisconsin School Boards Association.

In several states, the crisis has been felt in other ways: in
greater state payments to local districts, farmers' opposition to tax
increases, and the increased likelihood of tax and loan defaults.

In Iowa, for example, Mr. de Koster reports that the second half of
this year's tax collections are running substantially behind the first
half, a clear sign of a rising default rate.

Costs Shouldered

In Minnesota, the decline in property value has simply shifted costs
from the local level to the state, according to Gordon Donhowe, finance
director for the state's department of education.

"It's increased our costs by about $60 million a year," he said.
"It's a costly item, but it's our policy to pay it."

According to Mr. Donhowe, Minnesota's school-aid formula sets a
basic expenditure level of $1,455 per student and subtracts from that
the amount of money that a 23.5-mill levy raises at the local level.
The state pays the difference, including any increase due to declining
local assessments.

"It's had a big impact this year, some impact last year and some
next year," Mr. Donhowe said. "We expect a continued drop."

Same Shift in Wisconsin

Likewise, in Wisconsin, where land that used to sell for $3,500 an
acre now fetches half that, Mr. Tipler reports that declining land
values simply shift the burden of supporting schools to the state and
to non-agricultural taxpayers.

"Suppose the valuation is split 50-50" between farmers and city
dwellers in a given district, he said. "The city people will now pay 55
percent."

According to Mr. Tipler, Wisconsin bases its state aid on a set
valuation per child, and if a local district does not have that much
wealth, the difference is covered by the state. As a result, he said,
"if the value falls by 10 to 25 percent, the state will have a greater
state-aid obligation."

Local Problems Foreseen

In other states, the financial outlook is not as positive.

In Idaho, for instance, where only about 25 percent of
precollegiate-education costs are raised through local property taxes,
the state department of education received a smaller budget increase
this year than it had expected, primarily due to the legislature's
unwillingness to raise taxes, according to Robert Dutton, the
department's associate superintendent for finance.

The previous legislature "almost promised" the department a
substantial increase, Mr. Dutton said, but "they just simply couldn't
find the money, because they felt people couldn't afford it."

Idaho law limits the amount of lo-cal revenues that districts can
raise in a given year without calling a special election. And the same
pressures that came to bear at the state level could be felt locally,
Mr. Dutton said. Districts "may have unique problems getting overrides
or supplemental levies through," he said.

North Dakota Shortfall

Many of these problems came together recently in North Dakota, where
the legislature approved a switch to productivity-based assessments
that will cost the statepercent of its taxable valuation--about $32
million--and shift the tax burden to cities.

Alton N. Koppang, director of finance and reorganization for the
state education department, said districts can make up the shortfall by
simply increasing local levies. But according to Dave Meade, executive
director of the North Dakota Council of School Administrators,
limitations on the amount districts can levy without calling a vote
assure that "most of the districts won't quite make up the 7 percent
shortfall."

And even if districts do put the matter to a vote, they stand little
chance of winning. "Property owners are not willing to take on
additional burdens," said Eugene Burns, superintendent of the Epping
schools. "With the economic situation the way it is, a mill increase is
going down wherever it's presented."

"The concern of folks is such that they'll oppose anything that
looks like a tax increase," added Richard Ott, president of the North
Dakota School Boards Association.

Prediction's Reality

For Reid Strabbe, who took over as superintendent in Karlsruhe in
1981 and predicted that the district would shut down within five years,
the changes mean that his prophecy is likely to come true.

Mr. Strabbe had hoped to get a 10-mill tax increase passed this
year, knowing that "if I asked for 15 or 20 mills, it wouldn't
pass."

A 10-mill increase would have raised $9,000 for the schools, he
said, but with land assessments dropping by 7 percent, "it's zero."
Instead, it would take a 20-mill increase to raise the same $9,000, he
said.

Within two years, the district will be operating in the red, Mr.
Strabbe said.

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